Impact of the allowance allocation on prices and efficiency
AbstractSuccessful cap and trade programs for SO2 and NOx in the US allocate allowances to large emitters based on a historic base line for a period of up to thirty years. National Allocation Plans in Europe allocate CO2 allowances in an iterative approach first for a three then for a five-year period. The potential updating of the base line creates perverse incentives for operation and investment. Some allowances are also reserved for new entrants further distorting the scheme. We use analytic models and numeric simulations for the UK power sector to illustrate and quantify how these effects contribute to an inflation of the allowance price while reducing utilisation and investment in efficient technologies. The inflated allowance prices are likely to increase the European allowance budget and emissions, e.g. through the Linking Directive. As a result opportunity costs of emitting CO2 are reduced relative to an efficient cap and trade program.
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Bibliographic InfoPaper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0552.
Date of creation: Nov 2005
Date of revision:
Note: EPRG, IO
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Web page: http://www.econ.cam.ac.uk/index.htm
: Emission Trading; Allowance Allocation; Investment Decision; Operation; Inefficiencies.;
Find related papers by JEL classification:
- D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- D92 - Microeconomics - - Intertemporal Choice - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
- Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
- L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
This paper has been announced in the following NEP Reports:
- NEP-AGR-2005-11-12 (Agricultural Economics)
- NEP-ALL-2005-11-12 (All new papers)
- NEP-CSE-2005-11-12 (Economics of Strategic Management)
- NEP-ENE-2005-11-12 (Energy Economics)
- NEP-ENV-2005-11-12 (Environmental Economics)
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